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The downgrade is driven by concerns over continued credit deterioration and projections of earnings falling below the dividend, which could lead to a reduced dividend payout more aligned with cash flow.
The firm’s analysis indicates that Ready Capital’s diversified approach, while generally viewed positively, might not offset the anticipated credit challenges. The expected increase in credit loss reserves and a potential decline in book value are additional factors contributing to the downgrade.
The current allowance for credit losses (CECL) reserve of 2.0% is seen as insufficient compared to commercial real estate investment trusts (CMREITs) and banks, especially given a 9.9% delinquency rate.
The price target is based on historical spreads of 800-875 basis points over Treasury yields, which imply a 12-13% yield and suggest a lower stock price for Ready Capital. The firm’s distributable earnings per share (EPS) forecast also supports the case for a lower dividend, bringing it in line with actual cash flow.
Furthermore, despite Ready Capital having $139 million in cash and a leverage ratio of 3.3 times, there is concern that the company’s plans to issue debt could lead to higher interest costs. This financial strategy could potentially affect the company’s profitability and financial stability, prompting the downgrade to Underperform.
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